Tech Industry

Study: Billion-dollar outsourcing on the rise

The number of outsourcing deals worth more than $1 billion more than doubled last year, driven by an increase in government spending, according to a new report.

The number of outsourcing deals worth more than $1 billion more than doubled last year, driven by an increase in government spending, according to Datamonitor.

The market analysis firm said on Wednesday that its IT Services Contract Tracker--which monitors all new outsourcing, systems integration and consulting deals worth more than $1 million--found that the number of deals with a value greater than $100 million increased by 49 percent to 244, and deals worth more than $1 billion more than doubled to 29.

Datamonitor attributed the rise to new contract awards for managed information technology services from the United Kingdom's National Health Service and the U.S. Department of Defense. Both organizations have signed up outsourcers to upgrade their technology infrastructures.

The total value of all large IT services contracts last year amounted to $119 billion, which represents a 44 percent increase over the previous year. Total government spending more than doubled in 2003, with central governments in the United Kingdom and the United States signing contracts worth $18.5 billion. The defense sector came second, with outsourcing deals worth $18.2 billion, according to Datamonitor.

Nick Mayes, a managing analyst for Datamonitor's technology practice who is responsible for the IT Services Contract Tracker, said that although there was a "big surge" in the number of megadeals during 2003, they will not be as profitable as the deals signed during the dot-com boom.

"The majority of large deals will not be as profitable for the services providers as those long-term contracts that they signed in the 1990s. Clients have been able to squeeze some big cost reductions out of their incumbent suppliers, which are also being held to increasingly tight performance targets," Mayes said in a statement.

Big IT service deals often carry significant costs in terms of capital expenses and personnel additions.

According to Datamonitor, IBM Global Services was the biggest winner last year, taking 21 percent of all contracts, while Computer Sciences and Hewlett-Packard were reported to be making "significant gains" compared to their 2003 numbers.

In 2003, Hewlett-Packard announced a $3 billion, 10-year IT outsourcing contract with consumer goods company Procter & Gamble, as well as a $244 million, five-year outsourcing deal with Rome-based telecommunications company Telecom Italia.

For its part, IBM's wins last year included a $1.1 billion, 10-year IT services contract with ABB, a Swiss power and automation technologies company. Big Blue also announced a seven-year IT outsourcing contract with beverage company Diageo. Analysts familiar with the deal estimated its value at $400 million to $500 million. The company also landed a $1.21 billion contract with French tire maker Michelin.

Munir Kotadia of ZDNet UK reported from London. CNET News.com's Ed Frauenheim contributed.